France: A good start to reforms - HSBC

French economic activity expanded at a solid pace in the first half of the year, supported by stronger-than-expected corporate spending, points out the research team at HSBC.

Key Quotes

“Admittedly, business investment decelerated in the second quarter (1.0% q-o-q from 2.1% in Q1), but it was a solid performance given the expiry, in mid-April, of a temporary fiscal incentive aimed at spurring investment. That said, other GDP components have been less buoyant. Private consumption remained sluggish in Q2 (0.3% q-o-q from 0.1% in Q1) despite several supporting factors such as subdued inflation and an improving labour market. On the external front, a relative lack of competitiveness of French firms remains an issue. Although the contribution of net trade has been very volatile recently, over the first half of 2017 it subtracted the equivalent of 0.7pp from annual GDP growth.”

“Looking ahead, leading indicators signal that corporate investment should remain solid. Admittedly, business surveys have slightly receded recently, but they remain firmly above their long-term average, which suggests that sentiment is still supported by the global synchronised upswing and the prospects of pro-business reforms by the new government. Rising capacity utilisation, higher profit margins and accommodative financing conditions are also supportive for the investment outlook. However, the recent euro appreciation could hurt French exporters, which tend to be sensitive to the exchange rate given their lack of non-price competitiveness. As a result, GDP growth figures should ease a bit in the next few quarters. The recent moderation in consumer confidence surveys suggests that private consumption is unlikely to offset fully the negative impact on activity of the stronger euro.”

“Nevertheless, we markedly increase our forecast on GDP growth for this year (1.7% instead of 1.4%). It reflects in large part the strong growth in corporate spending in H1 2017, but we are also slightly more confident on the near-term outlook given that hard data has started to catch up with the upbeat business surveys. After that, we envision GDP growth of 1.7% in 2018 and 1.8% in 2019, above the potential growth rate. This should reduce the economic slack but price pressures are set to remain muted, in our view. Indeed, the current output gap is still large and wage growth is likely to remain weak given the strong link to current and past inflation.”